Australia | 10:00 AM
Telix Pharmaceutical's proposed acquisition of a global isotope manufacturing supplier brings forth a strategically significant opportunity, although not without risks.
- ITM's US$1.65bn acquisition comes with a big price tag and significant upside potential
- Securing reliable isotope supply is key to Telix’s radiopharmaceutical ambitions
- Analysts are upbeat on the strategic merits but also highlight increased complexity and risks
- Deal expected to be initially broadly earnings and cash flow neutral
By Danielle Ecuyer
The Telix Pharmaceuticals ((TLX)) announcement to join forces with Isotope Technologies Munich (ITM) came as a surprise on Monday, September 21.
As is usually the case, the proposed combination of two separate corporate entities has been presented as a "merger", but it is effectively Telix who's acquiring the German target.
The share market reaction has been anything but celebratory. The stock price fell almost -12% on the day.
In contrast, analysts covering the ASX-listed company are supportive of the proposed transaction, stressing the strategic importance of the move to vertically integrate into isotope manufacturing supply, as well as adding a potentially lucrative therapeutic pipeline, which will help secure greater control over production and supply.
Equally important, such a major transaction is not without risks, also resulting in a -30% dilution of current Telix shareholders.
The nuts and bolts of the deal
Telix announced the proposed "merger" with ITM, subject to shareholder and regulatory approval, for -US$1.65bn, against a circa $6bn market cap prior to the offer being made public.
Morgan Stanley, which is acting on behalf of Telix, points out ITM is a leading global supplier of therapeutic isotopes (radioactive isotopes typically used to treat cancer).
The upfront consideration of -US$1.648bn includes US$1.25bn of Telix shares to be issued at a price of US$11.84 (ADR), plus US$700m in milestone payments tied to regulatory approvals and sales milestones for ITM’s pipeline.
The consideration also assumes US$302m of net debt and US$96m related to management equity rollover and transaction expenses payable to the sellers.
UBS notes ITM shareholders will own 23.7% of the combined entity on completion, with deal conclusion expected by the end of 2026.
Breaking down the US$700m contingent consideration, this is made up of US$250m tied to ITM-11 FDA approvals and up to US$450m linked to FY30 global net sales, calculated at 3x ITM-11 global net sales above US$150m.
In terms of the valuation paid, the total consideration implies 5.1x last 12-month revenue of US$324m and 14.7x the last 12-month manufacturing EBITDA of US$112m.
Importantly, while ITM reported an EBITDA loss of -US$13m over the last year, its isotope manufacturing business generated US$112m in EBITDA, offset by a -US$109m loss from therapeutics and another EBITDA loss of -US$16m.
As noted by Morgan Stanley, ITM has a cost savings program in place to lower costs from FY25 levels, while Telix outlined scope to target synergies, reducing costs by an additional US$50m in the first two years post transaction.
RBC Capital considers the valuation reasonable when compared to the proposed acquisition of US radiopharmaceutical company Lantheus Holdings by privately owned Curium at FY26 EV/sales of 4.9x.
This analyst expects ITM to generate a compound average growth rate in revenue between FY26-FY30 of 25%.
As far as Bell Potter is concerned, the “stars aligned” for Telix, with its shares advancing to a 52-week high following the approval of Pixclara last week.
In contrast, ITM received a knockback from the FDA in August in the form of a Complete Response Letter relating to Chemistry, Manufacturing and Controls and third-party manufacturing facility matters for its late-stage therapeutic ITM-11, a Lu-177-edotreotide radiopharmaceutical for the treatment of gastroenteropancreatic neuroendocrine tumours.
The news would, however, likely have impacted the ITM's valuation, a positive for Telix, the analyst observes.
ITM aims to resubmit the new drug application to complete the FDA review.
The efficacy and safety data shown in ITM’s Compete Phase 3 Trial are viewed by RBC as another positive for ITM-11.
RBC believes the Complete Response Letter issues can be addressed and has ascribed a 60% probability of success to ITM-11 being approved by the FDA. UBS also believes the probability of FDA approval success is high.
UBS views the transaction price as a relatively “full valuation”, which reflects the strategic value of ITM’s isotope production outlook and potential and exposure to a fast-growing radiopharmaceutical market.
This analyst does acknowledge the acquisition adds further complexity to what is viewed as an existing “demanding clinical, regulatory and commercial agenda”.
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